Construction Loans- Good as an Interim Measure of Financing
Construction Activity
Construction of your house is going on at a normal pace when the
depleting finances threaten to disrupt the process. The
derailment in the construction activity will significantly
increase the cost of construction. If arranging finance within
such a short notice is turning out to be a difficult proposition
for you, then a construction loan will be helpful.
Construction loans is a
short-term loan unlike mortgages and home loans that have a
protracted repayment. The loan provider in this case will offer
the loan until the borrower regains the occupancy rights to the
home. This means that as soon as the borrower completes
construction and makes the home as a primary residence or a
second home, the loan is due for repayment.
There are no standardized guidelines to state the terms of the
construction loan as in case of mortgages, which are governed by
the rules made in Financial Standards Association (FSA).
Depending on the individual case specifications and the degree
of consideration that a borrower receives from the lender, a
borrower may be able to get construction loans at differing
terms.
The rate of interest for instance will be derived depending on
the stage at which the construction is, and with all parties to
the agreement, i.e. lender, borrower, and contractor (if any)
consenting to the rate found. Since it is a short-term loan,
construction loan borrowers must be prepared to shell out a
greater amount as the rate of interest. Mostly the rate of
interest is charged on the basis of adjustable/ variable rates.
Another distinguishing feature of construction loan is that it
is generally repayable through small interest-only repayments.
This makes them more convenient for borrowers since the
repayable instalment further lessens. However, this may be
taxing for people who will find it difficult to arrange the
entire amount immediately after completing the construction of
home, which in itself is an expensive affair.
For long-term financing needs, the construction loan has to be
converted into a permanent loan known as a take-out loan. The
conversion gives additional finance to the borrower along with
an extended term of repayment. Till the borrower finishes
construction, it is a construction loan. As soon as the
construction is over, the loan is converted into a mortgage.
However, this has its drawbacks. Borrower is locked in the deal
at the terms of the lenders. The options available are limited.
Either accept the terms of the lender or make an immediate
repayment. And a majority of the borrowers go for the former,
i.e. accept the deal being offered by the loan provider. Rate
lock is an important method by which borrowers can escape the
vagaries of the interest rate. The method of rate lock does not
allow the rate of interest from rising beyond a certain level.
The number of days that the borrower wants the rate lock to be
in effect will decide its price. Rate locks are typically for a
period ranging from 30 to 60 days. Rate locks become a
limitation when the rate outside fall further.
In construction loans, as in case of mortgages and secured
loans, home is in equal danger of being repossessed for
non-payment of the amount due. As per the rule, the borrower has
to put his primary residence as collateral. Expert advice thus
holds a place of prominence in the process of decision-making.
There are a number of sources from where advice may be had
easily. These include an attorney, certified public accountant,
or realtor unrelated with the loan providing organisation.
Individual prudence also needs to be applied because it is the
individual who is better aware of his financial circumstances
and thus the best decision maker.
James Taylor holds a Master's degree in Commerce from JNU he is
working as financial consultant for chance for loans.To find a
personal loan,bad credit loans that best suits your needs visit
http://www.chanceforloans.co.uk